Not only did the Fed announce its controversial $600 billion QE2 program today, but Ben Bernanke felt compelled to defend it in a Washington Post op-ed tonight. For the normally oracular Fed to feel it has to sell its program in a non-financial media outlet says Bernanke must recognize that he is staking on thin ice. The problem is he appears to believe the problem is at most one of perception, when it is in fact practical, that QE2 is unlikely to work, and if anything is more likely to produce collateral damage than achieve its intended aims.

And no one less than the co-CEO of Pimco, a bond fund and hence presumed fan of QE@ (bonds ought to benefit from Fed intervention) expressed his considerable doubts in an op ed at the Financial Times.

First to Bernanke, and the guts of his argument at the Post. After explaining why low inflation and the risk of deflation are reasons to act, he explains the presumed benefits of QE2:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

The Fed chair is so disengaged from reality it isn't funny. This is the classic wealth effect argument, that if you goose asset values, people will feel richer and spend more. The problem is it was an abysmal failure the first it was put into effect as a policy idea, in Japan in the later 1980s. The result was rampant asset speculation followed by a twenty year bust.

And the assertion that QE1 was a success of any sort is a canard. Unemployment is still stuck at just shy of 10%, with job additions still too low to absorb workforce increases. Housing appears to have bottomed in some markets, but that's only as a result of repricing so as to be more in line with long term relationships with income and rentals. The fact that Bernanke is worrying about deflation says it didn't do much to create expectations of price increases (or more accurately, consumers most certainly do expect price increases, but in select but important areas like food and energy prices, which are not well suited to the sort of anticipatory purchases that help increase general price levels). The uncertainty over foreclosures and the reality of shadow housing inventory (delinquent borrowers banks have not evicted yet, plus people who would like to sell but are unduly optimistic re a near term housing recovery) means that any prod to demand from super low rates is offset by concerns about supply pressures on housing prices (as in consumers are correctly concerned that they still face downside risk).

In addition, even if it worked, the low mortgage rate inducement is a con. The Fed hopes to create inflation. That means higher interest rates. If the Fed succeeds in its goal of achieving modest inflation (2-4%), the increase in funding costs for homebuyers would cycle back into less affordabilty. Anyone who understands that dynamic is again not going to want to gamble on the possibility that the Fed succeeds.

Emphasis is mine.

The silver lining is that the election could make Social Security reform more likely -- if the administration chooses to jump at the opportunity.
...
Given the left's strident opposition to any serious discussion of Social Security reform, the issue will provide a key early indicator of the administration's response to the election results.
NYT

In truth, without the crutch of high interest and unsubstainable personal debt, the US no longer enjoys the kind of broad prosperity that creates a mass consumer market -- that creates mass jobs -- and as such it can't support broad, middle class prosperity, no matter how much the government spends.

Starting in the 1980s we went from what I call the "Macy's and Chevy" mass market economy -- the era when working families routinely bought cars new and everyone shopped in large department stores that catered to all levels of consumer income, from bargain undies in the basement to high end silver and furs on the upper floors (a time when, for the most part, everyone's economic fortunes seemed to be moving forward together) -- to the Nordstrom/Walmart split economy. An economy split 20/80 into an "upscale" (rather than mass) market that includes not just the most wealthy, but, in larger numbers, an army of educated and creative service and technology providers that provide "value added" services and "upscale" products (generally not mass produced) to the wealthy and to each other. The other 80%, meanwhile, has experienced economic stagnation and retreat, and been reduced to purchasing the cheapest foreign goods on credit.  

The global corporations now sell into and compete in a hugh, global mass market -- so it doesn't much concern them if the American affluence is shrinking rather than expanding -- because increasingly they are selling to many, many more consumers outside the US.

in other more optimistic news this was pointed out on another blog:

NBC  counts 130 "Tea Party-backed candidates" running for House seats. Only 40 won, with eight races still undecided Wednesday afternoon.

HuffPo counts 48 conservative Blue Dog Democrats running for re-election. Only 23 won, with three races undecided Wednesday afternoon.

Daily Kos counts 72 members of the House Progressive Caucus. Only three lost.